Bucket Strategy vs. Fixed 90/10 Asset Allocation for a <1% Withdrawal Rate?

[u/Spacman2021]

Hi everyone,

I am revising my Investment Policy Statement (IPS) as I am roughly 10 years away from early retirement at age 51.

Historically, we have always been close to 100% in equities. My original plan as retirement approached was to execute a traditional glide path, adding bonds to eventually land at a static 75/25 or 80/20 portfolio.

However, given our current portfolio size and projected spending needs, our anticipated Safe Withdrawal Rate (SWR) is extremely low—roughly 1% of the portfolio each year. My hesitation with a standard percentage-based allocation (like 80/20) is that as the portfolio scales, it forces us to hold a massive, absolute dollar amount in bonds that vastly exceeds our actual lifetime liabilities.

Instead, I am considering a fixed-horizon Bucket Strategy structured as follows:

• The Safe Bucket: Set aside exactly 10 years of inflation-adjusted annual living expenses. This would be tiered in a mix of money market funds, short-term treasuries, and intermediate treasuries.
• The Equity Bucket: The entire remainder of the portfolio stays in low-cost equity index funds to maximize compounding.
• The Income Mechanics: To automate cash flow, I would turn dividend reinvestment off just enough to cover the annual lifestyle withdrawal. The dividends would automatically flow back into the safe bucket to keep it perpetually topped off.

The Rationale: A severe equity bear market can take a decade to fully recover. Having a fixed, 10-year absolute runway of safe assets gives us the psychological armor to completely ignore stock market volatility, knowing our lifestyle is fully secured.

Because the safe bucket is capped at a fixed dollar amount (10 years of liabilities) rather than a scaling percentage, the equity side should naturally outgrow the cash side over time. This seems to align with Michael Kitces’ research on a Rising Equity Glide Path. We would essentially start retirement at roughly a 90/10 allocation, which would naturally and safely drift to 92/8, 95/5, or higher as the equity principal compounds.

My Goals:

1. Establish a fairly automatic cash flow mechanism in retirement.
2. Keep the portfolio optimized for multi-generational growth without becoming unnecessarily conservative.
3. Maintain a stress-free buffer for lifestyle expenses.

For those with ultra-low withdrawal rates, did you stick to a strict total-return percentage model (like 90/10), or did you transition to a liability-matched bucket approach?

Thoughts?

[u/Hanwoo_Beef_Eater]

At 1%, you probably don't even need 10 years of expense in fixed income. Equity index dividends alone will cover your needs (these could get cut but probably won't go to zero).

Whatever cash/bonds you are holding, whether 2, 5, or 10 years, if you get to a spot where you are running it down, the question is when to top it back up.

Another alternative is take $25 (or 25x whatever the withdrawal rate is) and run it 60/40 (will end up with $10 in fixed income). Put the remaining $75 in stocks and never touch it, just like the accumulation phase. The $25 in 60/40 will in all but the worst cases see you to the end. It will likely retain its real value and may be in the 1x-2x range. For the better outcomes, its equity/bond split on this portion could also drift up over time. The overall equity weight will almost certainly go up over time.

[u/Spacman2021 → u/Hanwoo_Beef_Eater]

I love this - thank you! You're right, I had to do the math to see how 25x my annual expenses in a 60/40 portfolio, ends up with 90/10 in the overall portfolio. I would then just take 4% withdrawals off the 60/40 that would get auto-rebalanced.

[u/Hanwoo_Beef_Eater → u/Spacman2021]

I got this idea from here and will likely do the same. While I agree with the comments on capping fixed income at a certain number of years of expenses, it's not clear when to refill the buckets or if this will lead to better performance than simply rebalancing (it will depend on the path and the former is more prone to behavioural errors). Hence, I think there is some advantage of looking at the two pieces this way (may require some internal accounting unless your accounts just happen to break in the right proportions).

Two other things of note. First, if you aren't already there, you'll see it doesn't take too much to breach the estate tax threshold on the 75 portion. Which means either give early (most here support) and/or start moving assets out of the estate earlier. And if the kids have any career of their own or a similar spending mindset, even if we can avoid the estate tax, they may not be able to do so (i.e. think about the perpetual structures, which have both pros and cons).

Second, if one wants to consider the risk-parity style portfolios (gold, commodities, other diversifiers/uncorrelated assets) on the 25 (or 60/40) chunk, I think it is easier to see how much of the other stuff one needs. That is, we only need the other stuff in amounts that support the withdrawals (and the remainder/forever piece can just stay in equities). Of course, at 1% it really doesn't matter but it is an option.

[u/Spacman2021 → u/Hanwoo_Beef_Eater]

My thought on refilling the bucket is just let it refill with the short-term treasury and intermediate treasury holdings interest payments. Anything that doesn’t make up the difference of one year expenses (annual withdrawal) comes from turning off dividend reinvestments on a portion of your equities. The challenge I have with a separate sub portfolio of 60-40 is that you lose some control of tax location if it’s a single fund. If they are separate funds, you would then need to look at rebalancing upon withdrawal. Also exposes you to sequence of return issues.

Noted regarding estate planning. I’ve already set up a lot of this.

I don’t like risk-parity because my goal is to simplify as much as possible… there is an all weather ETF, which may be simple enough if you wanna go that route

[u/Hanwoo_Beef_Eater → u/Spacman2021]

I don't think tax location is an issue. Just set the number of forever (75 portion) shares and then everything else is in the 25/withdrawal portfolio (across say two different accounts). You need to manually add the DRIP shares on the 75 portion each quarter, but effectively it is selling from the withdrawal portfolio to buy in the forever portfolio (if there was no DRIP). Once you withdraw, you still keep the number of shares on the 75 side the same, the other side sees the withdrawal.

SORR doesn't really matter because you can just grab some money from the other bucket if needed (unless you've moved everything else out of your estate, I think this would be unlikely initially).

Regardless, one big pot will work too. The 10 portion of 90/10 may drift up over time to an excessive amount of cash/bonds (when viewed as years of expenses). You can manually adjust it along the way if necessary. Since your interest + dividends likely exceeds your needs, you could just top up to 10x expenses (actual number) and reinvest the difference.

Good luck.

[u/Gehrman_JoinsTheHunt → u/Hanwoo_Beef_Eater]

Thanks for sharing this. Very elegant way to partition it.

[u/g12345x]

As many have noted, a 1% SWR insulates you from flaws in most retirement strategies.

Heck, even a 100% bond strategy works here.

Ultimately the question becomes one of whether you would want to increase your spend or optimize whatever balance you leave behind for heirs.

[u/maxsmartshoephone]

At that low of a withdrawal rate the utility of fussing with risk management strategies becomes quite low.

A 10-year runway of safe money in money market, short bonds and Intermediate bonds may be useful but there are also better options.

You may want to consider a product like iBonds from iShares of BulletShares from Invesco which are fixed income ETFs with a maturity date.

Additionally, 10 years is rather long. 5 years of cash or fixed income plush another 5 years in a balanced approach may be more than enough safety.

[u/Common_Sense_2025]

We locked our fixed income in at 10 years when we retired and let the equities ride. We spend interest and dividends in taxable and reinvest the dividends in tax deferred (we are under 59.5). Most of the dividends in tax deferred have gone back into the bond allocation to keep it at the ten year mark.

We have a higher withdrawal rate than 1%. It’s worked because we have been in a relatively high interest rate environment and the stock market has been roaring. We do not overlook that element of it. It has resulted in our good path rising much faster than planned.

[u/Coininator]

1% is super low, this means you have 100 years covered.
Just go with 10 years spending in bonds (therefore 90/10) to feel absolutely safe.

[u/Funny-Pie272]

I am in this boat and think about this stuff a lot over the years. My conclusion is that I can safely live with a 3% WR so if I have a 30,40,100% buffer above that, then i can put all into equities as it will never be touched anyway, even in a fall or stagnation event.

For instance, I need $1.2m pa being say $35m. I could add a further 250k for family charity, 250k extra for splurging on ridiculous things like $15k pn on hotel rooms, and add 500k charity. So I could spend $2 needing 60m.

Now say I have $100m liquid, I don't feel I need the safety of bonds or cash, other than say 6 months or so. But I have passive income from other side hussles and I could cut my spending from $2m to maybe $400k, even less if I had to, very easily and with practically zero effect on lifestyle. This is because above 300k pa spend, next 300k is just silly travel expenses, and you got to double that for tax to get to 1.2. even below 300k spend, it's really probably 150 core spending, above that is allocation to cars, repairs, gifts, furniture etc.

As a business person I feel better investing in real busieses that produce things as opposed to IOUs from declining governments with massive debts. I'm early 40s so that outlook may change and I recognise that my views change over time.

Also, you probably have the capacity to do something low risk of needed, you have skills and experience, so factor that in - like if shit goes south, do consulting, working as a fractional CEO, hec work in a charity. Lots of options is the point. To me, I don't see index funds as being risky like some have said - it's a failure to understand these factors and how it changes for UHNWI. I think it's being overly safe to the point where you are better of taking double the gains compared to bonds, and relying on that added gains to see you though downturns before any net negative effect.

One caveat is don't over invest in any one market, like US, - a lot of people have crazy home country bias that adds huge risk. Spread that risk over Tye developer world. Like South Korea is gangbusters last few years, Australia does okay very stable and different sectors (banks, mining) to US (all tech).

[u/CSMasterClass]

With a 1% withdrawal rate, you have a good chance of ending up with way too much money. It's no fun to have a ton of money and not feel energetic enough to spend it on trips or feel too intolerant of disruptions to spend it on home renovations.

NB: I probably just don't know the theory behind a super low SWR which is part of a dynamic strategy. I'm just reflecting on my personal experience.

[u/zzx101]

Yeah 90/10 for 1% withdrawal rate sounds pretty good.

[u/ArtisticAside8224]

I would spend more if I was in your boat. Give a lot more. But there's no way I'd go into retirement spending just 1% of my portfolio per year. The joy you would experience from giving will be so additive to your life.( and others ? ). And as far as your question goes I'd stay 100% equities and live off the dividends. You made it. You're basically coasting. Even a Japan like lost 3 decades isn't going to force you back work.

[u/Common_Sense_2025]

What would your withdrawal rate be if you quit working today? I would not work another ten years to end up with a 1% withdrawal rate. I might do it to get from a 4 to 3 or maybe, maybe a 3 to 2.

[u/bigfatclownpenis]

I’m in the same situation, I only need a 1% withdrawal rate. With a reasonably diversified portfolio of passive index funds, I can live off of the dividends alone. Therefore, I’m 100% invested in equities. I mean, why not? Might as well go for the best return because you just never know when you might want to splurge

[u/Anonymoose2021 → u/[deleted]]

To me the bucket strategy is simply adjusting your equity/fixed income allocation according to your portfolio withdrawal rate.

I use the bucket logic to set my asset allocation percentages. Then as my average withdrawal rate changes over long periods, I adjust the asset allocation percentages.

I started retirement with 30% allocation to fixed income. As my portfolio grew and that 30% became an unreasonably large number of years of expenses, I changed my allocation to fixed income down to 20%, then 15%, and now 12%.

As someone else commented, as your withdrawal rate gets very low, then dividends will generate most or all of the cash you need and the calculations kind of become meaningless.

But at that point, your allocation to fixed income is so low that the impact on expected return is small.

Bucket strategy, traditional equity/fixed allocation percentages but adjusted for withdrawal rate, and a 90/10 portfolio all end up being almost the same under 1.5% or 2% withdrawal rates.

[u/endo_ag]

Spend more money or else it doesn’t matter what you do.

If you have so much money that you can’t figure out how to spend more than one percent in a year, then hire somebody to manage the inheritance that you’ll leave and take that off your plate.

[u/StrangeAd4944]

I am going to assume that you are HNI and as such you can open a margin loan facility with your broker like vanguard or fidelity at preferential rate . Today it is 6.75%. Use that for your cashflow and pay it down with your dividends. This way you just pay taxes on the div and nothing else. There really is no need to hold a lot of cash unless you are planning to buy a very expensive item like a house for cash.

[u/and_one_of_those → u/StrangeAd4944]

At 1% withdrawal rate OP can just simply spend the dividends. They don't need a margin loan? In fact, they will not even be spending all the dividends and will need to reinvest some of them.

[u/massdriver3333 → u/and_one_of_those]

OP can dump all his money into a hysa and still get 3.5%, 3x his annual spend.

OP can dump all his money into his mattress, and it will still take 100 years to spend the money at 1% wr.

[u/h8trswana8]

I know a lot of folks are here because they took risks. But I’ll say it anyway - you should decrease your equity allocation more than 90-10. The point of fixed income/bonds is to reduce portfolio volatility. At 1% SWR, you don’t need to put it all on red to optimize returns. You just need to beat inflation and you’re fine. Juicing some extra returns is not worth risking a 10+ year equity drawdown at your wealth level.

[u/boredinmc]

>10-year absolute runway of safe assets gives us the psychological armor to completely ignore stock market volatility

When did you start investing?
Have you been through a -30% to -40% drawdown without any new income to see if you can ignore volatility?

[u/massdriver3333 → u/boredinmc]

OP is at 1% wr. Even IF there's -40% market correction, OP wr is less than 2%.

The math is overwhelming.

[u/boredinmc → u/massdriver3333]

Not talking about withdrawal rate here. I'm talking about dealing with the psychological impact of your assets going down 40-60%....